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December 5, 2016

Long Term Care Insurance Industry Problems

I've advocated that most people would be better off saving the amount of the premium and investing it for retirement expenses rather than buy LTC insurance. The Wall Street Journal reports (12/4/2016) widespread problems in the industry. "Collapse of Long-Term Care Insurer Reflects Deep Industry Woes: Actuarial miscalculations on long-term-care policies by two units of Penn Treaty American have proved fatal," by WSJ writer Leslie Scism. "A pair of small Pennsylvania insurers focused on long-term care could
soon become one of the nation’s costliest insurance failures ever,
highlighting the widespread problems that have plagued the industry
niche for more than a decade." Scism explains:
"From the 1990s through the early part of the last decade, dozens of
insurers sold long-term-care policies, viewing the then-new product as a
growth engine that would address aging middle-class Americans’ worries
about paying for care later in life. The policies pay for personal aides
and extended nursing-home stays that Medicare, the federal
health-insurance program for the elderly and disabled, doesn’t generally
cover. The federal-state Medicaid program does pay for nursing homes,
but is available only to the poor."
"But most actuaries badly
underestimated costs, and the insurers then met resistance in many state
insurance departments when trying to push the pricing miscalculation
onto policyholders through steep rate increases. Some states did allow
double-digit-percentage increases, distressing the
often-elderly policyholders. Sales have collapsed amid the turmoil, and
fewer than a dozen insurers sell any significant volume today."

More than a dozen years ago Lance Palmer and I recommended an alternative to long term care insurance:

"Due to uncertain future income and premium increases
as well as the negative ramifications of letting a policy lapse,
educators and advisors should consider the advantages of the self
insurance option for long term care. Self insurance offers the
flexibility of using funds for long term care or basic living expenses
if other funds are depleted, and allows assets to be passed onto heirs
if no or little long term care is required. However, self insuring would
provide only approximately one third of the insurance coverage provided
by a competitive long term care insurance policy." http://ssrn.com/abstract=2255137